How are the 4 goals and outcomes 1 and 2 best obtained?

Taxpayers facing an egg shell tax audit should only be represented by experienced criminal tax defense counsel and the CPAs who perform via a Kovel agreement (United States v. Kovel, 296 F.2d 918 (2nd Cir. 1961)) effectively subordinating them to the attorneys supervision and rendering communication between the CPA and the client subject to the attorney client privilege. The original return preparer should never provide representation in an egg shell audit as they do not have attorney client privilege and are often subpoenaed to help make the government’s case in chief against the taxpayer. Also they cannot be trusted to be more concerned with protecting their own reputation than in helping the client avoid criminal prosecution.

Taxpayers faced with an eggshell audit are in dire need of an experienced criminal tax defense attorney who is able to advise the taxpayer on how exactly to comply with the auditor’s data requests, questioning, summonsing of records and all other investigatory techniques while simultaneously preventing the client from making criminal admissions or providing false information that can effectively waive the client’s 5th Amendment privilege against self-incrimination and 4th amendment privilege against unreasonable searches.

The Criminal Tax Defense Attorney’s largest concern in an eggshell audit is to dissuade the examining agent from referring the case to the criminal investigation unit of the IRS because CID’s primary mission is to deter the general public from committing tax crimes by criminally prosecuting a sample of taxpayers caught cheating to make an example out of them.

Once a revenue agent discovers significant and affirmative indications of fraud during a civil audit, he will first privately consult with his manager and upon receiving his managers approval he then secretly consults with a “fraud referral specialist” that works directly with the auditor to develop a “fraud development plan,” for the sole purpose of documenting the affirmative acts and firm indicators of fraud in order to refer the case to the criminal investigation function of the IRS. Criminal tax defense counsel must know when to weigh the benefit of continuing to cooperate with the civil revenue agent in an effort to quell the agent’s suspicion before a referral is made or choosing to advise his client to remain silent to protect the taxpayer from self-incriminating themselves by admitting to tax fraud or in making statements that the auditor later proves to be lies which amounts to a felony in and of itself as it is a felony to lie to a federal agent after a referral has been made.

Questioning the auditor regarding whether there is an open criminal investigation, grand jury investigation, associated technical fraud advisor or associated special agent of the criminal investigation division achieves different objectives in an eggshell versus a reverse eggshell audit. In an egg shell audit, this line of questioning may become necessary to protect the taxpayer but must be asked in such a manner as not to raise the auditor’s suspicion that tax fraud exists in the client’s fact pattern. If a reverse eggshell audit is underway, this line of questioning can help protect the taxpayer, because it will alert counsel to the existence of a clandestine criminal investigation or, if the revenue agent provides more than a tacit denial of the existence of a parallel criminal investigation, subsequent information and statements may be suppressible under Tweel.

One of the strongest protections available to criminal tax defense counsel is found under Tweel, which held that any auditor deception in a reverse egg shell audit has to be tacit rather than affirmative otherwise subsequently procured information will be suppressible. Thus when a revenue agent lies when he or she states that there is no parallel criminal investigation underway, a technical fraud advisor has not been associated with the audit, or if they continue their civil investigation after badges of fraud have been detected which are sufficient to trigger a halt to the civil examination and a criminal referral, any subsequently procured documents and statements are suppressible in a subsequent criminal prosecution.

An argument can also be made that all subsequent information and the taxpayer’s statements collected subsequent to the revenue agents original discovery of badges of fraud is inadmissible under Tousaint and thus can be suppressed. However contrary hair splitting case law holds that if the auditor’s conduct is merely a deception that violates IRS procedure but falls short of violating the U.S. Constitution or applicable federal statutes, the evidence collected by the auditor will not be held to be inadmissible in a subsequent criminal prosecution under Caceres and thus will not be suppressed. This split in federal case law creates a continuum of auditor behavior that requires measuring actions taken by an auditor that are often clandestine and thus hard to analyze and therefore makes the reverse egg shell audit extremely risky to the effected taxpayer.

It is often assumed that a taxpayer’s IRS master file is flagged if the taxpayer is involved in a criminal investigation, and thus a civil auditor could theoretically respond to an inquiry by a taxpayer’s representative whether there is an open criminal investigation, grand jury investigation, associated technical fraud advisor or associated special agent of the criminal investigation division. While the civil revenue agent will almost certainly be aware of the coding in the file, when queried, they will have to either answer honestly or more likely refuse to respond at all, in either event the criminal tax defense attorney will have learned something. In my opinion a refusal to deny a parallel tax criminal investigation is underway is as good as an admission that one is.

Accordingly, a taxpayer representative’s failure to ask the right questions at the sensitive juncture between an egg shell audit and it’s progression into a reverse egg shell, or failure to recognize the approaching juncture altogether, may result in a permanent loss of a taxpayer’s constitutional rights and privileges.

Procedures that this office commonly follows to minimize the risks of an eggshell audit are:

To prevent the taxpayer from making criminal admissions by limiting their involvement in the audit, preventing or where necessary closely controlling a client interview, only having first thoroughly prepared our client for the expected questioning they will receive.

We will attempt to relocate any interview originally scheduled to take place in the personal residence or the business establishment of the taxpayer because of the potential for an economic lifestyle analysis in their home and hard to control auditor access to the client’s business records and employees at their business premises.We also do not want to have the client or his or her employees present at any required business tour.

We will create thorough records of any damaging positions taken or alluded to by the agent.

Subsequent to the examination we may submit a FOIA request (Freedom of Information Act) to obtain a copy of the record created by the agent including his or her notes.

We only provide copies of information requested during the audit where required by the auditor and we keep a detailed record of what was provided.

Our client are thoroughly advised of the importance of not making false statements, as they can lead to obstruction charges in a criminal investigation and can constitute a felony in their own right even in a straight civil audit scenario.

We remain calm and professional at all times and establish a rapport with the Agent from the outset. This rapport, combined with our firm’s excellent reputation with the taxing authorities, has consistently been the difference between an audit proceeding as a straight civil matter rather than the matter leading into a criminal referral.

Our office is not afraid to have the client take the fifth in appropriate circumstances. Where a civil investigation has clear and definite indications of a clandestine criminal investigation the taxpayer can refuse to answer an auditor or subsequent criminal investigator’s questions on the grounds that the answers they provide may incriminate them. This action is sure to raise concrete suspicion on the part of the auditor but the failure of counsel to invoke the taxpayer’s Fifth Amendment privileges where appropriate can be far more damaging to a taxpayer in a parallel of subsequent criminal investigation as information gathered by the auditor indicative of fraud will certainly be used against them. Moreover, incriminating statements or information provided to an auditor may fully or partially waive the constitutional protections of the 4th and 5th amendments.

How are the 4 goals and outcomes 1 and 2 best obtained? was last modified: April 16th, 2019 by David Klasing

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